Driving to Real Ethanol Policy Transformation

By Bob Dinneen | April 18, 2011

About this time every year, the news media is filled with stories about the impending rise in gasoline prices that leads the summer driving season. It is as predictable as the tides. This year will no doubt see the same rise, but it will build on the already dramatic run-up in the price of oil and gas at the pump we have seen already this year.

Events around the world have created frenzy in the international oil markets that have some predicting record oil prices this summer. The result could be gas prices not imagined by Americans—even when gas averaged $4 per gallon just a couple of years ago. 

While those in the oil industry and their allies on Capitol Hill complain and lament our investment in domestic ethanol production, the impact it is having on American gas prices is very real. And without it, the pain at the pump would be unbearable.

Economists from the likes of the U.S. DOE, Iowa State University and Merrill Lynch have examined the impact of increased ethanol blending on consumer gas prices and concluded it has has generally reduced the price of gasoline by 15-50 cents per gallon. For the average American driver, that’s an annual savings of $120 to $400 dollars. These savings result not only from the fact that ethanol has been 50 cents to $1 per gallon cheaper than gasoline at the wholesale level for the past several years, but also from the fact that replacing 13 billion gallons of gasoline reduces aggregate oil demand and, thus, exerts downward pressure on gasoline prices across the supply chain.

It also doesn’t account for the 45-cent tax credit available to small businesses such as independent gasoline marketers who receive the majority of the tax credit. All things being equal, the application of the tax credit alone reduces the cost of gasoline production with ethanol and makes all E10 blends at least 4.5 cents cheaper than straight gasoline.

Such a dynamic provides the backdrop for important discussions about the future of ethanol policy. The ethanol industry itself has worked in good faith with each other and lawmakers to transition and transform current policies to reflect budget concerns yet ensure the continued growth and evolution of the industry. Such a plan must include three critical elements.

First, there needs to be recognition that volatility in the oil markets is a real and present danger to biofuel investment and the American economy. Any plan to transform current ethanol policy must recognize these market economics. One approach being discussed is a variable tax credit based on the price of oil. Keep in mind the idea behind such an incentive, like the current version, is to drive demand. At $100 oil, for example, a tax incentive is likely not needed to drive new demand. We are just two years removed from $39 oil, however, and at that price, marketers will seek to maximize petroleum use making such an incentive critical. A variable incentive would provide a fiscally responsible backstop to the oil price volatility that would protect taxpayers and the investments in the industry.

Second, investments must be made to put more flex-fuel vehicles (FFVs) on the road and more ethanol fueling infrastructure in the ground. A mix of consumer tax incentives and mandates on the sale of FFVs would go a long way toward putting more Americans behind the wheel of such a vehicle. Likewise, a similar mix of policies would be quite effective for installing the roughly 60,000 blender pumps it would take to achieve the goals of the renewable fuels standard.

Third, policies that accelerate the construction and deployment of commercial-scale advanced ethanol biorefineries and technologies are essential. The majority of the renewable fuels standard and ethanol demand above E10 blends must come from cellulosic and advanced sources of ethanol. Implementing policies, such as properly functioning loan guarantee programs that accelerate commercialization will provide many advanced ethanol companies with that final push they need to cross the finish line.

Transforming ethanol policies will not be easy. Vested interests seek to thwart our efforts at every turn and the appearance of division within the industry itself is causing even our most ardent champions on Capitol Hill discomfort. As I said in the State of the Industry address in Phoenix, we must focus on what the right ideas are and care less about whose idea is right. There is simply too much at stake.

Author: Bob Dinneen
President and CEO of the
Renewable Fuels Association
(202) 289-3835